The Bottleneck Bottleneck

Bottlenecks are always problematic. It seems like they are always too narrow or not narrow enough.

We ran into an unusual bottleneck last week when were went to Wenatchee to help our friends Mike and Karen Wade bottle the 2008 vintage at the Fielding Hills Winery. FHW is award winning 800-case operation and the bottling is done by a volunteer crew of friends, family and wine club members. I wrote about it in one of my first blog posts, comparing the wine bottle assembly line to Adam Smith’s famous pin factory.

Bottleneck Bottleneck

The division of labor does improve efficiency, just as Smith said, but anyone who’s worked an assembly line knows about bottlenecks – the whole process only moves as fast as the slowest work station. If the corker is slow, for example, nothing else will go very fast. (The corker was no slacker on our shift – John Sosnowy of the Wine Peeps blog.)

Our crew worked very well, but there was still a bottleneck, albeit an invisible one. The capsules that fit over the bottle’s neck hadn’t arrive (a bottleneck bottleneck!) – they were held up somewhere in customs in a container that must contain hundreds of thousands of capsules for many wineries. We bottled the wine, but when the capsules finally arrive it will be necessary to open each of the 800 cases, pull out every bottle, affix the capsule, return and reseal. That’s about 10,000 bottles. What a headache! I hate bottlenecks.

The biggest bottleneck in the American wine business, of course, is distribution. With 51 different sets of state rules and regulations and the three-tier winery/distributor/retailer/consumer system, it sometimes seems like making wine is the easy part – getting it to customers is the bigger problem. Widening the distribution bottleneck seems to me to be a key to expanding the wine market and building a more robust American wine culture.

Tightening the Distribution Bottleneck

The Obama administration seems to want to build up the U.S. wine industry – that’s why he sent Commerce Secretary Gary Locke to Hong Kong to sign an agreement to ease the wine export process and open that bottleneck a bit.

But Congress is moving in the opposite direction. Wine Spectator reports that more than 100 members of Congress have announced support for H.R. 5034, a bill that would further restrict direct wine sales in American. It would make it (even) harder to ship wine across state lines. Wine Spectator reports that wine distributors (who benefit from their key position in the three tier bottleneck) actively support the bill.

The supporters of H.R. 5034 argue that direct shipping undercuts the power of states to regulate alcohol distribution and sales, and I understand this logic. But the winery owners I know actually go to extremes to satisfy state regulations because the penalties for making a mistake are often extremely onerous. (I know one winery that has stopped all interstate sales for now because of compliance concerns.)

Focus on Direct Sales

The slack economy has put direct sales in the spotlight. With wine sales down in many categories and price points still eroding, wineries are trying to boost the yield per bottle and increasing direct sales and reducing the flow that goes through distributors is one way to do that. Isenhower Cellars in Walla Walla has actually reorganized itself (and opened an off-site tasting room) so that it can rely entirely on direct sales. Their website announced that

Isenhower Cellars is no longer selling wine to restaurants, wine shops, or grocery outlets in Washington State. Our wines are now exclusively available from the winery in Walla Walla, Washington, our tasting room in Woodinville, Washington, or here on our web site. We treasure the past relationships with our Washington State distributors and friends in the wine trade. However a complete focus on quality limits production to 2,000 cases of wine and the success of our wine club and second tasting room leaves no extra Isenhower wines available for sale outside of our winery’s embrace.

Even E&J Gallo, which has done quite well thank you during the recession, is trying to increase direct sales. I’m on a couple of email lists for Gallo wine brands that I follow and they frequently offer nice discounts or low cost shipping to try to encourage orders from their online wine shop, The Barrel Room.

It seems inconsistent to send Gary Locke to China to expand wine exports and then discourage the equivalent interstate trade. As an economist, I am naturally biased toward more choice and freer trade. I hope the attempt to tighten the wine shipping bottleneck gets caught in some legislative bottleneck somewhere down the line and never reaches President Obama’s desk.

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Thanks to Karen, Mike and Robin Wade for their hospitality and great wine. Thanks to the members of the 2008 FHW Cabernet Franc bottling crew both a fun and productive afternoon.

The Wine Economist

What would you get if you crossed the Wine Spectator, America's best-selling wine magazine, with the Economist, the world's leading business weekly? The answer is this blog, The Wine Economist, which analyzes and interprets today's global wine markets. Staff: Mike Veseth (editor-in-chief) & Sue Veseth (contributing editor).